# Appendix — Laclede Gas Co. v. Public Service Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_0591%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1981 - **Citation:** 449 U.S. 1072 ## Text Supreme Court, U.S. 80-576 ioeceadiad 0 1980 MICHAEL RODAK, JR., CLERK No. L™ IN THE Supreme Court of the United States October Term, 1980 LacLeDE Gas Company, Appellant, Vv. Pusuic Service Commission or Missouri, Appellee. ON APPEAL FROM THE SUPREME COURT OF THE STATE OF MISSOURI SEPARATE APPENDIX TO JURISDICTIONAL STATEMENT JaMes B, LiperMAn 26 Broadway New York, New York 10004 Tel, (212) 248-6900 Counsel for Appellant Of Counsel: Donavp L. Gopiner 720 Olive Street St. Louis, Missouri 63101 Tel. (314) 342-0508 Tra H. Jouues Berlack, Israels & Liberman 26 Broadway New York, New York 10004 Tel. (212) 248-6900 ed TABLE OF CONTENTS TO SEPARATE APPENDIX Appendix A Appendix B Appendix C Appendix C-1 Appendix D Appendix D-1 Appendix D-2 Appendix D-3 Appendix E Appendix F PAGE Order of Supreme Court of Missouri A-1 Opinion of Missouri Court of Appeals A-2 Opinion, dated October 23, 1978 of the Circuit Court of Cole County ....... A-17 Order dated March 28, 1978, as amended on March 30, 1978, of the Cireuit Court of Cole County ..... A-28 Report and Order, dated April 21, 1978, of the Missouri Public Ser- vice Commission ..............-:..::0+--+---- A-34 Order Denying Application for Re- hearing, dated May 1, 1978, of the Missouri Public Service Commis- MUD: sichissinesnindsiaaiiediiatinialiabiais A-107 Report and Order, dated July 1, 1977 of the Missouri Public Service COUT cscicinetesstninchiapnteadininai A-171 Order Denying Application for Re- hearing, dated July 19, 1977, of the Missouri Public Service Commis- IIE cciccnnevinssticdacehtieecdisscnaiiiglatantien Same A-173 Notice of Appeal .0.0....2........::::cccce000 A-175 Revised Statutes of Missouri DT TD -sensistsisticcianesicscscddeeieetonedan A-177 DS TED icecssesenssntesecissnbcctulicteans A-177 9 SOB.140 (1) (5) ..n.cccececcsrerscccsestocoes A-178 A-1 APPENDIX A Supreme Court No. 62303 IN THE SUPREME COURT OF MISSOURI Western District No. 30581 May Session 1980 State ex rel, Lactepe Gas Company, Relator-Appellant, v. Pusiic Servick CoMMIssION oF Missour!, Respondent. rrr: iim TRANSFER Now at this day, on consideration of Relator-Appellant’s Application to transfer the above entitled cause from the Western District Court of Appeals, it is ordered that said application be, and the same is hereby denied. State or Missourt—SCT. I, THOMAS F. SIMON, Clerk of the Supreme Court of the State of Missouri, certify that the foregoing is a full, true and complete transcript of the judgment of said Supreme Court, entered of record at the May Session thereof, 1980, and on the 15th day of July 1980, in the above entitled cause. Given under my hand and seal of said Court, at the City of Jefferson City, this 15th day of July, 1980. Tomas F’, Simon, Clerk. By Anne Beruorst, D.C, A-2 APPENDIX B MISSOURI COURT OF APPEALS Western District No. KCD 30581 STATE EX REL, LACLEDE Gas CoMPANY, a corporation, Relator-Appellant, US, Pusuic Service CoMmMission oF Missourt, Respondent. OPINION FILED MAY 5, 1980 APPEAL FROM THE CIRCUIT COURT OF COLE COUNTY SS Honorable Byron L. Kinder, Judge Before Wasserstrom, C, J., Presiding, Shangler, Pritchard, Swofford, Somerville, Clark and Manford, JJ. This is an appeal from a Cireuit Court judgment affirm. ing' an order of the Public Service Commission. The order established new rate schedules for the natural gas utility. The judgment is affirmed. The instant proceedings commenced with the filing of new proposed rate schedules by Laclede Gas Co. (herein- after referred to as Laclede) with the Publie Service Com- 1. The parties hereto agree and this court construes the judgment . ne circuit court as affirming the P.S.C.’s order because of its “net effect”. f° °°? A-3 mission (hereinafter referred to as the P.S.C.) on August 16, 1976. The proposed rate schedule was designed to in- crease Laclede’s gross operating revenues by an annual amount of $13,570,000 exclusive of gross receipt taxes. Pursuant to § 393.150(1), RSMo 1969, the P.S.C., under date of September 7, 1976, suspended for a period of 120 days the effective date of the proposed schedule. The sus- pension was to allow sufficient time to study tle effects of the proposed schedule and to determine if they were reason- able, just and in the public interest. On October 13, 1976, pursuant to § 393.150(2), RSMo 1969, the P.S.C. further suspended the effective date of the proposed schedule for an additional six months. This order also established a schedule for the filing and service of the staff’s (P.S.C. staff’s) and intervenors’ testimony and ex- hibits; scheduled public hearings at several locations within Laclede’s service area; scheduled a prehearing conference for March 28, 1977 and directed hearings to cross-examine witnesses on April 18, 1977. On February 3, 1977, the P.S.C. permitted intervention by the City of St. Louis, St. Louis County, General Motors Corporation, the Monsanto Company, ACF Industries, Inc., Anheuser-Busch, Ine., McDonnell Douglas Corporation and Nooter Corporation, as industrial intervenors. In addition, Lela Vasal (a consumer advocate), the Utility Consumers Council of Missouri, Inc., and the Missouri affiliate of the Association of Community Organizatica for Reform Now were also permitted to intervene. Public hearings were conducted on March 28, 1977 at Poplar Bluff, on March 29, 1977 at Farmington, on March 30, 1977 at Festus, on April 4, 1977 in the City of St. Louis, on April 5, 1977 at Clayton and on April 6, 1977 at St. Charles. On April 18, 1977, another hearing was held in Jefferson City, which continued for eight days, and upon the completion of this hearing, the record in these proceed- ings was closed, except for the filing of late-filed exhibits. A-4 Following the hearings, a briefing schedule was estab- lished and dates were prescribed for submission of briefs by all the parties. On an earlier date, (April 7, 1977) a preconference hearing had been held, at which time certain matters were stipulated to between the parties. The test year was established as the twelve-month period ending September 30, 1976, based upon actual data adjusted for that time period. In their stipulation, the parties agreed that a year-end rate base be used. They also agreed that the figures shown in the exhibits were mathematically correct regarding dollar amounts. Three major issues, which included numerous subtopics, were defined for consideration. These were: I Rate Base Issue : (a) Minor construction work in progress (CWIP) (b) Cash Working Capital—Minimum Bank Balances (c) Depreciation Reserve Il Nev Operatine Items-Cost or SERVICE (a) Unaccounted-for gas expense (b) Charitable contributions (c) Advertising charged to sales expense (d) Advertising charged to administrative and general expense (Labor negotiations adver- tising) (e) Dues and donations charged to administrative and general expense (f) Salaries charged to sales expense (g) Rate case expense (h) Wage expense-Missouri National Division (i) Deferred income taxes on certain general and administrative expense capitalized (j) Research and development-coal gasification ' project conducted by the American Gas Asso- A-5 ciation and the Energy Research and Develop- ment Agency (k) Main (piping) replacement program (1) Other issues raised by public counsel III Cost or Caprran AND Rate or Return (a) Return on repriced equity (b) Return on original cost common equity (c) Capital structure (d) Fair value rate base Upon issue of its initial order, followed by a petition for review, the P.S.C. failed to make findings of fact and to enter conclusions of law as required, and the Circuit Court reversed the order, directing such P.S.C. findings and conclusions be made. The following is a listing of only those findings relative to the issues to which this opinion is directed. Net OperatinG ItemMs-Cost or SERVICE The P.S.C. concluded Laclede’s unaccounted-for gas expense on a ten-year average amounted to $674,000. The P.S.C. also concluded that the sum of $252,000, represent- ing charitable contributions, was not a proper item includ- able in the rate schedule. The P.S.C. concluded that of the total sum expended for advertising, the sum of $219,399.40 was properly included in the rate schedule as being inform- ative advertising designed to promote safety, conserva- tion and/or off-peak gas use. The remainder of this expense was held to be goodwill advertising. Laclede had been involved in labor negotiations and had expended the sum of $9,465 in newspaper advertisements relative to the problems related to these negotiations, The P.S.C. con- cluded that such advertisements were goodwill advertise- ments and not includable in the rate schedule. The sum of A-6 $19,470, representing dues and donations to various organi- zations, was denied by the P.S.C. as part of the rate schedule. Laclede proposed to include the sum of $62,553 as salary expense for the display and sale of gas appli- ances. The P.S.C. denied this amount within the rate schedule. In preparation for the instant proceedings, Laclede had hired or retained the services of Foster & Associates, utility consultants, for the sum of $5,000, and the P.S.C. approved this amount as part of the rate sched- ule. Laclede has within its structure a Missouri Natural Division and its salary pension costs and FICA taxes increase in the sum of $79,500 were included within the rate schedule by the P.S.C. The P.S.C. denied the request to include the sum of $483,700 in deferred taxes. Determina- tion of this issue was made upon the conclusion that no evidence was shown to indicate that Laclede would or might possibly suffer any cash flow problem relating to tax adjustments. Laclede, as a participant in a $30,000,000 coal gasification project is required to pay, as its annual contri- butive share, the sum of $86,000, and the P.S.C. approved inclusion of this cost in the rate schedule. Gas utilities, Laclede stated, are required to replace piping within their systems and this process is referred to as the main replace- ment program. The P.S.C. staff had recommended that Laclede be required to budget an additional $125,000 for pipe replacement. The P.S.C. concluded that such expense need not be required. A petition for review was filed by Laclede and after being ordered to do so by the circuit court, the P.S.C. filed its conclusions and the above findings. The circuit court, following arguments on the issues, then entered its judg- ment. Both Laclede and the P.S.C. filed notices of appeal. During the pendency of the proceedings before this court, the P.S.C. filed a motion to dismiss the appeal upon the premise of mootness. This motion was ordered taken with A-7 the case on appeal. The P.S.C. voluntarily dismissed its appeal, leaving the parties as Laclede as appellant and the P.S.C. as respondent, rather than as cross-appellant as first recorded. The case was scheduled to the “en bane” docket of this court, and both parties presented oral argument. This court must first turn its attention to the pending motion to dismiss for mootness by respondent P.S.C. While, as will be later explained, no immediate or direct relief to either party can ensue from this opinion, some of the issues involved present matters of general public interest and persuade this court to dispose of those issues. The P.S.C. correctly argues that due to the extensive time lag occurring as a result of the extended proceedings hefore the P.S.C., the cireuit court and the time before this court, Laclede has, in fact, applied for and has re- ceived authorization for additional rate schedules. Never- theless, as previously stated, the instant case presents some issues of general public interest which create an overriding influence and which cause this court to over- rule respondent’s motion to dismiss in part. While arguments were presented to this court upon the issue of fair value rate base and fair rate of return, along with claimed constitutional violations, this court, for the reasons set forth below address only two of the arguments presented. These arguments are (1) there was no sub- stantial and competent evidence to support the P.S.C.’s disallowance of $204,691, this amount representing adver- tising charged to sales expense, because such action unlaw- fully deprives appellant of its constitutional right to free speech, deprives appellant of its right to meet competition, and permits the unlawful substitution of the P.S.C.’s judg- ment for that of appellant company and (2) there was no substantial and competent evidence to support the P.S.C.’s disallowance of the sum of $252,000, this amount repre- senting charitable contributions, because such action per- A-8 mits the unlawful substitution of the P.S.C.’s judgment for that of Laclede’s management. The scope of review by this court is equivalent to that of the cireuit court. Review is made of the findings and order of the P.S.C. and not the circuit court, see Ingram v. Civil Service Commission, 584 8.W.2d 633 (Mo. App. 1979). Following the review of almost 2,100 pages of trans- seript of the P.S.C’s record, almost 300 pages of trial transcript, lengthy briefs by both parties and some 95 exhibits, this court concludes there are only two issues to be addressed. These are (1) was the denial of certain advertsing costs as part of the rate structure lawful and reasonable? and (2) was the denial of charitable contribu- tions as part of the rate structure lawful and reasonable? These two issues are taken up and ruled upon because they present matters of general public interest and may be presented in other unrelated proceedings. The arguments related to fair value rate base and rate of return, along with confiscatory rate making, present no viable legal issues and in conjunction with the prohibition against retroactive rate niaking, are found to be moot. Review of this cause lies within the jurisdiction of this court pursuant to Mo. Const. Art. V, Section 18 (amended August 3, 1976). The role of this court is to determine the lawfulness and reasonableness of the P.S.C.’s order, In determining the lawfulness of such order, the court need not defer to the Public Service Commission. Regarding the reasonableness of such order however, this court cannot substitute its judgment for that of the P.S.C. if such order is supported by competent and substan- tial evidence, see State ex rel. Utility Consumers Council of Missouri, Ine. v. P.S.C., 585 S.W.2d 41, 47 (Mo. bane 1979), citing State ex rel. Dyer v. Public Service Commission, 341 S.W.2d 795 (Mo. 1960), cert. denied 366 U.S. 924 (1961). A-9 See also State ex rel. St. Louis-San Francisco Ry. Co. v. Public Service Commission, 439 S8.W.2d 556, 559 (Mo. App. 1969) for the rule that commission order enjoys presump-~ tion of validity, and the burden to prove invalidity is upon the party attacking such order. The P.S.C. derives its authority exclusively from the legislature. The first P.S.C. law was enacted in 1913 under SB 1, Mo. Laws See. 1-140 (1913) and from its inception, the courts have recognized the purpose of such enactment to be the protection for the consuming public against the public utilities as natural monopolies. This protection, how- ever, has been and continues to be balanced against per- mitted recovery by utilities of a just and reasonable return upon their investment of properties committed to service for the public, see May Dep’t Stores Co. v. Union Electric Light & Power Co., 341 Mo. 299, 107 S.W.2d 41, 48 (1937) ; State ex rel. City of Sedalia v. Public Service Comm’n, 275 Mo, 291, 204 S.W. 497 (1918), appeal dismissed 251 U.S. 547 (1920). As regards the two issues addressed herein, Laclede argues that advertising costs should be charged to opera- tional expenses and hence be a factor built into the rate schedule. Laclede also argues that to deny this expense would deny the utility from meeting competition, would violate its right to free speech and would constitute substi- tution of the judgment of the P.S.C. for that of company management. Laclede concludes that the record as a whole herein does not contain substantial and competent evidence to support the P.S.C.’s denial of the inclusion of such expense. The P.S.C. refutes Laclede’s contention on the premise that the user or ratepayer should not be required to pay for “goodwill” advertising by Laclede. During the test year (1976), Laclede expended a total sum of $424,090 for adver- tisement expense. The order entered in the instant case A-10 permitted the sum of $219,399 to be included in the rate schedule. The P.S.C. declared the sum of $204,691 to rep- resent goodwill advertising and disallowed said sum. Research reveals a scarcity of authority upon the precise point. It should be pointed out that much attention was given this proposal by the P.S.C. and the sum permitted ($219,399) was attributable to advertising for informative purposes related to conservation, off-peak usage and safety. The amount granted was 51.7% of the total advertising expenditure. The authority provided by both parties to this appeal really fails to dispose of the issue entirely. Laclede offers up a managerial and constitutional argument, and this con- trasts with the statutory and discretional argument offered by the P.S.C. Laclede cites First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978), cert. denied USS. , 98 S.Ct. 3126 (1978), which involved a state statute prohibiting banks and other corporations from influencing referendum proposals which did not affect the property, assets or business of the particular corporation. The statute in question imposed criminal sanctions. The court held the statute invalid as its breadth caused an absolute prohibition of corporate communications. This case is obviously dis- tinguishable and not controlling herein. As to other authority offered up by Laclede, such is equally not con- trolling or persuasive. Thus, Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Ine., 425 US. 748 (1976), dealt with a state statute involving criminal sanctions to be imposed upon pharmacies for advertising prices for drugs. While the court in Virginia held the statute to be unconstitutional as an absolute prohibition upon free speech, the court was careful to emphasize that the real issue was the authority of the state to suppress the dissemination of truthful information. In addition, Laclede refers the court to Bigelow v. Virginia, 421 U.S. 809 (1975), A-11 which dealt with newspaper advertising for an abortion clinic. In this case, the court held that a statute may not, by its overbreadth, violate the first amendment. Schneider v. New Jersey, 308 U.S. 147 (1939) was a case where a city ordinance was declared unconstitutional because it prohib- ited the distribution of pamphlets and the canvassing of residents for a religious cause, even though this religious cause was found to be fraudulent. Laclede futher directs this court’s attention to New England Telephone and Telegraph Company v. Massa- chusetts Department of Public Utilities, 275 N.E.2d 495 (Mass. 1971). In this case, the Supreme Court of Massa- chusetts held that since the advertising costs involved were so negligible as they related to the overall revenues of the utility and that the Department of Public Utilities did not find such costs to be unreasonable, that the utility as a service provider was entitled to promote and enlarge its business through advertisement. It should be noted in the New England Telephone and Telegraph case that the court appeared to emphasize the “service” agreement of the util- ity. This, the court feels, must be contrasted with, as in the instant case, a utility which provides an energy source which has an ultimate depletion status. Further, Laclede cites Alabama Power Company v. Alabama Public Service Comission, $59 §8.2d 776 (Ala. 1978) wherein Alabama’s highest court permitted as operational cost advertisement of honest and efficient management of the power company. State of Oklahoma v. Oklahoma Gas and Electric Company, 536 P.2d 887 (Okla. 1975) was a decision holding invalid the prohibition against institutional advertising. This latter decision, however, also pointed out the necessity of the utility to establish a benefit to all rate payers from advertising, and upon failure to do so, the regulatory com- mission could disallow such costs. State ex rel. Kansas City v. Publie Service Commission, 301 Mo. 179, 257 S.W. A-12 462 (1923) was a Supreme Court case involving a common carrier. The court held that the Public Service Commission holds no property interest in utilities. In State ex rel. City of St. Joseph v. Public Service Commission, 325 Mo. 209, 30 S.W. 2d 8 (bane 1930), a case involving a water company, the State Supreme Court declared that the company man- agement could not be interfered with as long as the result thereof did not affect the public’s rights. State ex rel. Harline v. Public Service Commission, 343 8.W.2d 177 (Mo. App. 1960) was a case involving a power utility. This case declared that the regulatory power of the P.S.C. does not embrace the general management of the utility incident to ownership. The last case Laclede cites on this issue is State ex rel. Southwestern Bell Telephone Co. v. Missouri Public Service Commission, 262 U.S. 276 (1923), which stands for the proposition that the regulatory power of the P.S.C. does not clothe the P.S.C. with general powers of company management incidental to ownership. While it is correct that utilities operate within our free enterprise system, the courts remain mindful that these same utilities are, in fact, by their nature monopolies. The history of regulation of such monopolies has been one of a continued balance between preserving the existence and integrity of the utility so it might continue service to the users, and protection to the users and ultimate ratepayers against unwarranted costs for utility services. From the authorities considered upon this point, certain principles emerge, which permit disposition of this issue. It is obvious that the P.S.C. has no authority to take over the general management of any utility. It is just as obvi- ous that a utility is a person under our laws entitled to all the constitutional safeguards as to free speech provided for under the first amendment to the United States Con- stitution and made applicable to the states by the 14th amendment. A-13 These principles, however, esteemed and remaining as basic matters of right, must also, at each instance, be placed in prospective to the matters at hand. Taclede is in the business of supplying a product neces- sary to modern living and admittedly deals in a product which has a limited source because it is a fossil fuel. As the limitation of source continues, prices react in relation to that progressive limitation. The P.S.C. gave specific attention to the nature and ex- tent of the advertising in question. The evidence is com- petent and substantial to support the finding of the P.S.C. that costs of advertising related to safety, off-peak usage and conservation are proper cost items to be included within the rate schedule. The evidence herein does not support Laclede’s argument that the P.S.C. undertook the management of the company or that such action by the P.S.C. violated any constitu- tional right of Laclede to the exercise of its right of free speech. The order of the P.S.C. does not prohibit advertising by Laclede. If it had, this order would, without question, have violated the constitutional and managerial rights of Laclede. What the order prescribes is that advertising cost items directly related to the benefit of ratepayers are justified operational costs permitted to be included within the rate schedule. All other such expenses, while they too are decisions of management, are not operational costs ineludable in the rate schedule. This court is persuaded that §3938.140(5) and § 393.270(4), RSMo 1978 authorize the P.S.C. to examine the methods, practices, regulation and property employed by public utilities, and that such authorization extends to examination of advertising cost. This court finds of partic- ular persuasion the case of State of Oklahoma v. Okla- homa Gas and Electric Company, supra, at 894, in that it adopts the principle therein when it states: A-14 “We conclude the Commission may disallow any institutional advertising expenditures from operat- ing expenses for ratemaking purposes unless the utility establishes such expenditures benefit all rate- payers.” By the adoption of such a rule, the managerial preroga- tives of Laclede are maintained, and the right of Laclede to continue to exercise its right of free speech is preserved, while at the same time the P.S.C. can perform its regu- latory role of balancing the integrity of regulated utilities against the protection of the ratepayer. This court concludes that pursuant to the statutory authority cited herein, denial of certain advertising costs was lawful and further, there was substantial or competent evidence that the finding of the P.S.C. was reasonable. Turning to the question of charitable contributions, Laclede argues that the sum of $251,574.26, which repre- sents charitable contributions, should be permitted as part of the company’s total operating expenses and hence in- eluded within the rate schedule. The P.S.C. denied the requests, claiming inclusion of such expenditures would vio- late the long-standing policy against ineluding such sums, a policy which dates back to 1918 when in In Re Kansas City Light & Power Co., 8 Mo. P.S.C. 223, such request was denied. Laclede argues that the P.S.C. cannot lawfully disallow such sum absent a showing by competent and substantial evidence of bad faith or abuse of discretion by the com- pany’s management. Laclede further argues that to deny such sum is to unlawfully substitute the P.S.C.’s judgment in lieu of the company’s management’s judgment. The P.S.C. is granted authority under § 393.150, RSMo 1978 to fix utility rates upon a showing that the increased A-15 rate is just and reasonable. The realm of this authority has been defined as including “...the power to determine what items should be included in a utility’s operating ex- pense and what items should be excluded...in order that the commission may arrive at a reasoned determination of the issue of ‘just and reasonable’ rates.” State ex rel. Hotel Continental v. Burton, 334 S.W.2d 75, 80 (Mo. 1960). From the foregoing, it cannot follow that there must be a showing of bad faith or an abuse of company discretion in denying certain operatioral cost requests. The reasoning formulated by the P.S.C. in its denial of this sum falls within the discretion of the P.S.C. to render the decision to deny the request. The reasoning is summarized as follows: (1) Donations are adequately encouraged through income tax deductions. (2) Contributions are discretionary, thus not normal business expenditures. (3) Benefits from such expenditures accrue primarily to the stockholders, there- fore, the stockholders should bear the burden of such ex- pense. (4) The amount of contributions would have an effect on decisions in rate cases and should, for that reason, not be included. (5) Allowance of the contributions would require the ratepayers to make involuntary contributions to the various charities. The action taken by the P.S.C. does not override the management of the company. The company may still exercise its judgment as to the giving or not giving of sup- port to any one or several charitable causes. On the re- cord, it is shown that the P.S.C. did not make an arbitrary decision, but in fact accorded Laclede full opportunity to make the request for inclusion of this sum. Pursuant to § 393.150, RSMo 1978, and the evidence upon this record, it is concluded that the action of the P.S.C. was lawful, and there is competent and substantial evi- dence to uphold the ruling of the P.S.C. as reasonable on A-16 its denial of charitable contributions as a sum includable in the rate schedule. As has been pointed out, this court is not authorized to afford immediate relief to either party, and can only affi-m the action taken by the P.S.C. or remand for further pro- ceedings by the P.S.C., see Union Electric Company v. Clark, 511 S.W.2d 822 (Mo, 1974); State ex rel. Fee Fee Trunk Sewer, Inc. v. Public Service Commission, 522 S.W. 2d 67 (Mo. App. 1975) ; State ex rel. Detroit-Chicago Motor Bus Co. Ine. v. Public Service Commission, 324 Mo. 270, 23 S.W.2d 115 (1929); State ex rel. Egan v. Public Service Commission, 319 S.W.2d 917 (Mo. App. 1959) ; State ex rel. Middlewest Freightways, Inc. v. Public Service Commis- sion, 261 S.W.2d 252 (Mo. App. 1953); State ex rel. Byers Transportation Co., Ine. v. Public Service Commission, 246 S.W.2d 825 (Mo. App. 1952) ; State ex rel. Kansas City Transit, Inc. v. Public Service Commission, 406 S.W.2d 5 (Mo. bane 1966); State ex rel. Chicago, Rock Island and Pacific Railroad Company v. Public Service Commission, 312 S.W.2d 791 (Mo. bane 1958); State ex rel. Dyer v. Public Service Commission, supra; State ex rel. Pitcairn v. Public Service Commission, 232 Mo. App. 609, 110 S.W. 2d 367 (1937); State ex rel. Dail v. Public Service Com- mission, 240 Mo. App. 250, 208 S.W.2d 491 (1947) ; Peoples Telephone Exchange v. Public Service Commission, 239 Mo. App. 166, 186 S.W.2d 531 (1945) and State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Serv- ice Commission, swpra, because to do otherwise would be retroactive rate making prohibited by the authority cited herein. The judgment of the circuit court is, for the reasons set forth herein, affirmed. All econeur. Donald L. Manford, Judge A-17 APPENDIX C [Under date of October 23, 1978, the following entry appears of record in the office of the Circuit Clerk, Circuit Court of Cole County, in Causes Nos. 29542 and 30398, Laclede Gas Company v. Public Service Commission. ] “Now on this date the Court again takes up the matter previously taken under advisement. The Court finds the issues in favor of Petitioner and against the Respondent. Respondent reversed. See Findings of Fact and Conclusions of Law and Judg- ment.” FINDINGS OF FACT CONCLUSIONS OF LAW, AND JUDGMENT This action is before the Court on petition filed by the Relator Laclede Gas Company seeking judicial review of the Report and Order of Respondent Public Service Com- mission of Missouri issued on July 1, 1977 in Case No. GR-77-33 in which the Commission permitted Relator to file new rates to produce $8,718,140 additional gross revenues annually rather than the $13,570,000 annual increase sought by Relator. By its order entered on March 28, 1978 as amended March 30, 1978, Division No. 2 of the Cole County Circuit Court in Cause No. 29542, reversed the Commission’s July 1, 1977 order and remanded said cause to the Commission with instructions that “appropriate findings of fact” be made. Thereafter on April 21, 1978 the Commission adopted a new order and Relator filed a writ of review as Case No. 30398 which was consolidated with this case. The entire record, proceedings and evidence before the Commission have been filed with and considered by the A-18 Court. Relator and Respondent have filed briefs and made oral argument in support of their respective positions. The Court, having considered the pleadings, the entire record, proceedings and evidence before the Public Service Commision, the briefs and oral arguments of the parties, the applicable law, and being fully advised in the premises, now makes and files its Findings of Fact, Conclusions of Law and Judgment thereon as follows: FINDINGS OF FACT 1. The proceedings under review were commenced by Relator filing with Respondent on August 16, 1976, new rates for gas service designed to increase Relator’s gross revenues in the amount of $13,570,000 annually, exclusive of gross receipts taxes. 2. Pursuant to Section 393.150 V.A.M.S., Respondent suspended the rates, held extensive hearings and on July 1, 1977 issued its Report and Order denying the rates proposed by Relator and allowing Relator to file new rates to produce additional gross revenues of $8,718,140 annually, exclusive of gross receipts taxes. Respondent’s subsequent order issued on July 1, 1977, adopted the rates allowed in the first order permitting Relator to file new rates to produce additional gross revenues of $8,718,140 annually, exclusive of gross receipts taxes. 3. The parties stipulated and Respondent agreed that the appropriate test year was the twelve months ended September 30, 1976, based on actual data as adjusted for that period and that a year-end rate base should be used, that is, a rate base as of September 30, 1976. 4. In determining the percentage of common equity in Relator’s capital structure for purposes of determining cost of capital, Respondent removed from Relator’s com- A-19 mon equity the sum of $9,894,934 consisting of Account 124.00 investments of $2,442,934 and investments in non- utility subsidiaries of $7,452,000. Related facts are as follows: a. The Account 124.00 investments of Relator are all utility related except the investment in St. Louis Pipeline Company, the revenues of which were included in Relator’s operating revenues, and which was earning a return greater than that sought by Relator. Respondent so found in its Order. b. The amount of $7,452,000 representing invest- ments in nonutility subsidiaries was never included in the capital structure used by Relator and Respond- ent in the rate case. e. The funds ($7,452,000) originally loaned by Relator to its nonutility subsidiaries had been repaid to Relator three days prior to the end of the test year and restored to its capital structure by one of such subsidiaries with the proceeds of the subsid- iary’s loan from a bank. Respondent so found in its Order. d. Even if the $7,452,000 could be considered to be in the capital structure, it is impossible to deter- mine from what source (component of the capital structure) the dollars represented by the two invest- ments aggregating $9,894,934 came. Respondent so found in its Order. e. The total capital structure of Relator for the purpose of this case is $227,150,056. Respondent so found in its Order. f. The two investments in question, to the extent they are in the capital structure, are presently pro- A-20 rated among the various components of Relator’s actual capital structure which, with agreed adjust- ments, is as follows: Customer deposits ................ $ 3,207,096 Long-term debt .................0+++ 118,333,000 Preferred stock .................... 10,790,600 Common equity .. . 94,819,360 $227,150,056 g. The percentages of the various components of Relator’s capital structure are as follows: Customer deposits ................-0-+-- 1.41% Long-term debt. .................c..ssccsese 52.10 PATI TE secctcipriesevicerccvessess 4.75 ComMOn CQUITY .........ceeceeceereeenees 41.74 100.00% 5. Respondent failed to make a proper finding of a fair value rate base for Relator. Related facts are as follows: a. In determining a fair vaiue rate base, Respon- dent weighted trended cost by 39.09% which it had arrived at by removing $9,894,934 from Relator’s equity. The percentage of equity with the $9,894,934 restored is 41.74%. 6. Respondent concluded that Relator should be entitled to a return on book equity of 13.4%. Related facts are as follows: a. Witnesses for Relator offered evidence of the earnings of nonregulated companies for periods prior to 1976 which companies in their opinion were comparable in risk to Relator and applied those A-21 earnings to the common equity of those companies repriced by the use of the Consumers Price Index. b. Earnings data for 1976 on such nonregulated companies, which were up over prior years, were considered by Relator’s witnesses. ce. The average return on repriced equity of Re- lator’s chosen comparable nonregulated companies was 9.4% over a 10 year period and 8.8% over a 5 year period, both being in excess of the related re- turn on common equity being sought by Relator in this case. d. The Staff witness did not determine companies of comparable risk, did not consider 1976 earnings data because it was not available to him, and did not take fair value into account in his analysis on the advice of counsel. e. The Staff witness found returns on book equity of 17 gas distribution companies to range from 12.5 to 14.5 percent and of 124 nonregulated companies to range from 13 to 15 percent. f. The Staff witness placed Relator’s recom- mended return at a lower position in the ranges of rate of return because Relator had limited financing requirements and a favorable gas supply situation. g. None of the witnesses for Relator or the Staff recommended that return on common equity be de- termined by reference to what ratio of market value to book value of common stock should be available to Relator. h. The Staff witness was of the opinion that the market to book ratio should be above 1, with a A-22 cushion for flotation costs, but could not say how far above 1 the ratio should be. i. Relator’s witness was of the opinion that utili- ties should be granted a return which would permit their common stock to be sold at 1.30 to 1.50 times book value to compete with the group of nonregu- lated companies he considered of comparable risk. j. Respondent rejected all of the evidence on rate of return other than that relating to market value to book value ratios. k. Respondent’s determination of 13.4% as the permissible rate of return on equity for Relator was predicated solely on a calculation which would permit Relator to sell common stock at a market to book ratio of 1.03. 1. It is impossible to determine from the record how the ratio of 1.03 was derived. 7. Respondent excluded from Relator’s operating ex- penses the sum of $204,691, being a part of advertising charged to sales expense. Related facts are as follows: a. The advertising which was disallowed was advertising promoting the general use of gas and was designed to sell Relator’s product and meet its competition. Respondent so found in its Order. b. Relator’s gas supply situation is such that it can now and into the indefinite future supply the needs of its present and future customers except new large industrial customers. ce. Increased utilization of a gas distribution sys- tem spreads fixed costs and overheads over more A-23 sales, thereby reducing unit costs and maintaining rates lower than would otherwise be possible. d. Respondent disallowed the advertising in ques- tion upon the sole ground that it was goodwill advertising. e. There is no evidence in the record of bad faith or abuse of discretion on the part of Relator’s man- agement in making the expenditures in question. f. The expenditures in question are not in viola- tion of Respondent’s general order prohibiting promotional practices. Nor has Respondent held any generic hearing or given any other notice to Relator of its intention to disallow such advertising expense. Nor has Respondent disallowed such advertising expense of Relator’s principal compet- itor Union Electric Company. 8. Respondent decreased Relator’s booked income tax expense by $483,700. 9, Respondent increased Relator’s actual test year-end depreciation reserve by $224,015 in determining rate base. 10. Respondent disallowed as operating expenses char- itable contributions aggregating $252,000 made by Relator during the test year. There is no evidence in the record of bad faith or abuse of discretion on the part of Relator’s Management in making the expenditures. CONCLUSIONS OF LAW 1. Respondent erred in removing the sum of $9,894,934 from Relator’s common equity because: a. There was no factual basis for removing the $7,452,000 from the capitai structure because it was never there to begin with. A-24 b. Even if the $7,452,000 could be considered in the capital structure, there was no factual basis for removing the $9,894,934 from the capital structure at all since the Account 124.00 investments were utility related and the funds loaned by Relator to nonutility subsidiaries had been repaid to Relator and couid therefore not be financed by Relator’s equity. Re- spondent so concluded in its Order. ce. Since the source of the investment was fungi- bly financed by all of Relator’s sources of finance, such investment was appropriately represented in Relator’s capital structure prior to the Staff remov- ing it from equity. It therefore, had to be restored to equity. Respondent so concluded in its Order. d. Respondent found that the sum had been re- moved by its Staff from equity but had been repaid by Relator’s subsidiary to Relator. Therefore, the payment must be restored to such equity. e. Respondent’s purported prorating in fact dis- torted the existing proration and in fact had the same effect as removing the entire $9,894,934 froin Relator’s common equity contrary to Respondent’s findings and the finding of this Court. f. Respondent’s determination of Relator’s capi- tal structure and the weighting of the various com- ponents thereof is not supported by competent and substantial evidence upon the whole record. g. Respondent’s determination of Relator’s capi- tal structure created fictitious amounts of customer deposits, long-term debt and preferred stock in ex- cess of any deposits taken or any debt or preferred stock actually issued. Respondent created such by transferring a portion of Relator’s equity to de- A-25 posits, debt and preferred stock. No basis exists for such transfer. h. Relator’s capital structure and the weighting of the various components thereof which are sup- ported by competent and substantial evidence upon the whole record, are as follows: Customer deposits .......... $ 3,207,096 1.41% Long-term debt ................ 118,333,000 52.10 Preferred stock ................ 10,790,600 4.75 Common equity ................ 94,819,360 41.74 $227,150,056 100.00 2. Respondent erred in failing to make a proper finding of a fair value rate base for Relator because: a. Respondent improperly removed from Re- lator’s common equity $9,894,934, thereby weighting trended cost by only 39.09% rather than by the 41.74% which should have been used. 3. Respondent’s determination in establishing Relator’s allowable rate of return on equity at 13.4% is lawful, reasonable, proper and is based on competent and sub- stantial evidence upon the whole record. 4. Respondent’s excluding the sum of $204,691 from Relator’s operating expenses as “goodwill” advertising is lawful, reasonable, proper and is based on competent and substantial evidence upon the whole record. 5. Respondent’s reduction of Relator’s booked income tax expense by $483,700 relating to certain administrative and general expenses capitalized per books but expensed for tax purposes is lawful, reasonable, proper and is based on competent and substantial evidence upon the whole record. A-26 6. Respondent’s increase of Relator’s test year-end de- preciation reserve by $224,015 in determining rate base is lawful, reasonable, proper and is based on competent and substantial evidence upon the whole record. 7. Respondent’s disallowance of $252,000 of charitable contributions as operating expenses made by Relator dur- ing the test year is lawful, reasonable, proper and is based on competent and substantial evidence upon the whole record. 8. By reason of Respondent’s unreasonable and unlaw- ful actions described in paragraph 1 and 2 of these con- clusions, the rates fixed by Respondent for Relator are confiscatory and deprive Relator of its property without due process of law and without just compensation in viola- tion of Sections 10 and 26 of Article I of the Constitution of Missouri and Section 1 of the Fourteenth Amendment of the Constitution of the United States because they do not permit Relator an opportunity to earn a fair and reasonable return on the value of its property at the time it is being used to render service to the public. State ex rel. Southwestern Bell Telephone Company v. Missouri Public Service Commission, et al., 262 U.S. 276, 43 S.Ct. 544, 67 L.Ed. 981, PUR 1923 C, 193 (U.S. Sup. Ct., 1923) ; Bluefield Water Works & :mprovement Company v. West Virginia Public Service Commission et al., 262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176, PUR 1923 D, 11; Central Maine Power Company v. Maine Public Utilities Commission, 136 A.2d 726, 21 PUR3d (1975). JUDGMENT IT 1S THEREFORE ORDERED, ADJUDGED AND DECREED THAT: 1. The Orders of Respondent Public Service Commis- sion of Missouri issued on July 1, 1977 and April 21, 1978 A-27 in MoPSC Case No. GR-77-33, are reversed and set aside for reasons set forth in the foregoing Conclusions of Law; and that the Court finds that said orders are not based on substantial and competent evidence on the record as a whole and are unreasonable and unlawful. 2. The costs of these actions are assessed 50% against Relator and 50% against Respondent. Dated this 23rd day of October, 1978. FILED: Octoser 23, 1978. A-28 APPENDIX C-1 IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI Division Two No. 29542 LacLEDE Gas CoMPANY, a corp., Petitioner, v. Pusuic Service CoMMISsION Respondent. ORDER On July 22, 1977, a Petition for Writ of Review was filed by Petitioner herein. The Return was filed by Respondent, Public Service Commission on August 22, 1977. Briefing schedule was completed on November 14, 1977. On January 20, 1978, the parties appeared by their respective counsel and argued the case to the Court. The case was then taken under advisement. Since that date, the Court has on numerous occasions examined the file and has attempted to rule this case as this Court is so directed to rule under the provisions of Section 386.510 of the Missouri Revised Statutes. The purported Findings of Fact prepared by the Com- mission begin on Page 3 of the Commission’s Report and Order and ramble for the next 44 pages and nowhere in that volume of verbage does this Court find anything that closely approximates a recitation of the ultimate facts actually found. . As far back as 1917, and as recently as 1958, the Supreme Court of Missouri has held that the Public Service Com- A-29 mission is a creature of the legislature formed for the pur- pose of finding facts and drawing conclusions of law from those facts. (See Atchison, T & S F Railroad Company, et al v. Public Service Commission, 192 SW, 460 (1c) 462, and State of Missouri ex rel Chicago Rock Island and Pacific Railroad Company v. Public Service Commission, 312 SW2d, 791 (1c) 796). Rudimentary English and basic logie dictate that the facts must be set forth in an intel- ligible manner. This Court does not mean to single out this Report and Order for chastisement, however, this report represents a practice of the Commission which substitutes verbage for concise findings. I, therefore, must in the discharge of my statutorly de- fined duties remand this case to the Public Service Com- mission with direction that appropriate Findings of Fact be rendered. To aid the Commission in that task, I attach to this Order a copy of a Memorandum opinion written by the Honorable Frank Cottey in the case of City of St. Joseph v. Chicago, Great Western Railway Company, a corporation, No. 23833. This Court adopts that Memoran- dum and makes it a part of this Order as though it were fully set out herein. The Court further admonishes the Commission to follow the dictates of that Memorandum in full. Now Txererore, It Is OrnpErED, ApJuUpDGED AND DECREED that this matter be, and it hereby is, remanded to the Public Service Commission with instructions that appropriate Findings of Fact be made. Dated: March 28, 1978 Byron L. K1nper -Crrcurr. Juper, Drviston Two A-30 IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI Case No. 23833 City or St. JosepH, a MunicrpaL CorPorATION, Complainant, —VsS— Cuicaco, Great Western Rartway Company, A CoRPORATION, Defendant. + rr